Ambac (ABK) cuts dividend

Ambac Financial Group (NYSE: ABK) may have kept its Moody's "Aaa" rating, but its shareholders paid a big price. The muni-bond insurer cut its dividend from $.07 to $.01. According to a release from the company it will also be "suspending structured finance writings for six months is expected to free up approximately $600 million in capital." This means it is exiting underwriting financial guarantees using credit default swaps. The firm believes that this will save $600 million.

The announcement highlights the fact that muni-bond insurers will save themselves by undercutting almost all of the value of their shareholder's investments. Ambac's stock has fallen from over $96 to about $11 over the last year. A cut in the dividend nearly eliminates a 2.4% yield.

The danger has not passed for investors. If Ambac is split into two entities, as many experts have proposed, one of the new arms will have the good muni-finance underwriting business and the other will have the weak structured finance operation. It is not clear what current stockholders would end up owning.

Shareholders in Ambac had been hammered and there is probably nothing they can do about the fact that management made awful bets.

Douglas A. McIntyre is an editor at 247wallst.com.